Presentation Transcript

1. Executive Summary – Asset Allocation StudyUniversity of MissouriApril 2009 Joe Nankof 203.621.1722 Robin Pellish 203.621.1723Gary Veerman 203.621.1739 a
2. Introduction Primary objective of Retirement Plan assets Meet future benefit commitments Secondary objectives Maximize returns on invested assets at an acceptable level of risk Minimize required contributions to the Plan Purpose of this asset-liability analysis Examine the Plan’s liabilities and investment assets in a variety of scenarios to determine the best asset allocation policy for the Plan to accomplish the above objectives Initial stage of the asset-liability analysis (this Board meeting) Review various asset classes Review various capital market assumptions (outlook for the future) Present for discussion several possible asset allocation mixes to incorporate into the second and final stage analysis The second and final stage of the analysis (next Board meeting) Examine the funded status and contribution projections for a range of possible asset allocation mixes. Determine the asset allocation policy for the Plan assets b
3. What We Know About the Plan Assets and Liabilities An important part of the analysis is the expected growth of the portfolio assets relative to the expected growth of the liabilities. As of 9/30/08, the Retirement Plan was overfunded at 103% of liabilities on an actuarial (smoothed) basis, but, given the magnitude of the market decline in the 4th quarter 2008, it is likely that there is a gap between the Plan liabilities and assets as of calendar year-end 2008. If the Plan were fully funded, the annual budgeted Plan contribution would approximately cover the service cost earned by plan participants each year. Given this contribution level, the Plan assets would have to grow by 8% to meet the liability discount rate assumption of 8%. However, assets have declined significantly on a market value basis over the past year. Therefore, we project that assets would have to grow by about 10.7% per annum to maintain the current funded status. Given asset class return expectations, it seems unlikely that a 10.7% average annual return will be achieved over a multiple year time frame. Therefore, unless contributions rise or we realize a higher than expected return for the portfolio, the funded status of the Plan will decline. c
4. Growth of Funding Deficit Note: the analysis above should be used for illustrative purposes only and does not reflect current or projected UM asset and liability values. d
5. Asset-Liability Study Process and Timeline Identify alternative asset mixes Detailed projections of liabilities Stage 1 Today Scenario Testing Thousands of simulations under a variety of economic and market conditions Stage 2 June 4-5, 2009 Board meeting Long-Term Strategic Policy e
6. No Clear Winners… Benefits of Diversification f
7. We Still Believe in Diversification In 2008, allocations away from traditional U.S. equity/U.S. fixed income portfolios were punished as other equity, bond and alternative asset classes generally underperformed. Diversifying a traditional portfolio with 10% Non-U.S. Equities and 5% Real Estate would have detracted approximately 0.8% from performance in 2008. A very diversified portfolio, as shown in the accompanying chart, would have produced returns that lagged the traditional portfolio by 5.4% in 2008. Over the past ten years, the very diversified portfolio added 3.0% on an annualized basis above the traditional stock/bond portfolio. g
8. Strategic Asset Classes The Retirement Fund is broadly diversified across a wide variety of asset classes Expected funded status risk could be reduced with a modest reduction in return by reducing the allocation to public market equities There are other asset classes which could improve the diversification of the Fund although significant allocations would be required to have a material impact on the expected risk and return of the Fund. h
9. Strategic Asset Classes Equities U.S. Equity Non-U.S. Developed Equity Emerging Equity Fixed Income Core U.S. Fixed Income Non-U.S. Developed Fixed Income Treasury Inflation-Protected Securities (TIPS) High Yield & Bank Loans Long Bonds Emerging Market Debt (EMD) Convertibles Alternatives Private Real Estate Public Real Estate (REITs) Private Equity (Buyouts & Venture Capital) Commodities Absolute Return UM currently has exposure to the asset classes in bold. Blue highlighted asset classes are being proposed as additions to the current investment structure. i
10. Asset Class Market Assumptions Next 10 year return assumptions reflect the higher overall level of risk premiums currently priced into the global financial markets. Sources: GMO, Rocaton j
11. Defining Risk All investors have become more conscious of portfolio risk over the last two years. Risk is multi-dimensional and should be viewed from a number of perspectives. Some of the important metrics of risk are noted below: Standard Deviation Funded Status Macro Environment Risk Other factors The definitions are provided in the full report. k
12. Asset Class Market Assumptions – U.S. Equity Equity Market High October, 2007 Reach New Highs August, 2016 Rocaton Forecast 10%/year Based on our expected annual compound return of 10%, the broad equity market will take approximately 7 years and 6 months to reach October, 2007 highs. Sources: GMO, Rocaton l
13. Model Assumptions for Assets Asset Class Constraints: Credit Risk: Bank Loans + High Yield + Emerging Markets Debt ≤ 30% Liquidity Risk: Private Equity + Private Real Estate + Absolute Return ≤ 15% Inflation Risk: Commodities + TIPS ≤ 25% General Assumptions: U.S. Equities = Non-U.S. Developed Equities Private Equity = 67% Buyout + 33% Venture Capital Emerging Market Equities = 20% Developed Market Equities Asset Class Floor = 3% Additional details are provided in the full report. m
14. Efficient Frontier Analysis n
15. Possible Candidate Asset Mixes o
16. Asset Class Environmental Exposures p
17. Portfolio Environmental Exposures q
18. Summary The analysis shows that the Fund: Is broadly diversified across a wide variety of asset classes. Could reduce expected funded status risk with a modest reduction in return by reducing its fairly significant allocation to public market equities. Does not currently allocate to four asset classes (commodities, emerging market debt, high yield bonds, bank loans) which, if included, could improve the diversification of the Fund. Would have to make significant allocations to the new asset classes to have a material impact on the expected risk and return of the Fund. Will have to finance an expected funding deficit through a combination of increased contributions and investment returns. The next stage of this analysis will examine the impact on expected funding status and contributions caused by moving from the current target asset allocation to any one of the candidate allocations. r
19. Disclosures The analysis contained in this document may contain historical information which may not be indicative of future experience. The analysis contained in this document may contain long-term, forward-looking assumptions regarding risk and/or return. These assumptions are used for modeling purposes only and may not be realized. The potential impact of active management may not be included in the analysis. This analysis was prepared on a best-efforts basis and no warrantees or guarantees are made with respect to any reliance made on this analysis. s